An Awesome reply from the CEO of JP MORGAN !!!

 A young and pretty lady posted this on a popular forum:

Title: What should I do to marry a rich guy?

I’m going to be honest of what I’m going to say here. I’m 25 this year. I’m very pretty, have style and good taste. I wish to marry a guy with $500k annual salary or above.

You might say that I’m greedy, but an annual salary of $1M is considered only as middle class in New York.

My requirement is not high. Is there anyone in this forum who has an income of $500k annual salary? Are you all married?

I wanted to ask: what should I do to marry rich persons like you?

Among those I’ve dated, the richest is $250k annual income, and it seems that this is my upper limit.

If someone is going to move into high cost residential area on the west of New York City Garden (?), $250k annual income is not enough.

I’m here humbly to ask a few questions:

1) Where do most rich bachelors hang out? (Please list down the names and addresses of bars, restaurant, and gym)

2) Which age group should I target?

3) Why most wives of the riches are only average-looking? I’ve met a few girls who don’t have looks and are not interesting, but they are able to marry rich guys.

4) How do you decide who can be your wife, and who can only be your girlfriend? (My target now is to get married)

Ms. Pretty

NOW ON THIS COMES

A philosophical reply from CEO of J.P. Morgan:

Dear Ms. Pretty,

I have read your post with great interest. Guess there are lots of girls out there who have similar questions like yours. Please allow me to analyse your situation as a professional investor.

My annual income is more than $500k, which meets your requirement, so I hope everyone believes that I’m not wasting time here.

From the standpoint of a business person, it is a bad decision to marry you. The answer is very simple, so let me explain.

Put the details aside, what you’re trying to do is an exchange of “beauty” and “money”: Person A provides beauty, and Person B pays for it, fair and square.

However, there’s a deadly problem here, your beauty will fade, but my money will not be gone without any good reason. The fact is, my income might increase from year to year, but you can’t be prettier year after year.

Hence from the viewpoint of economics, I am an appreciation asset, and you are a depreciation asset. It’s not just normal depreciation, but exponential depreciation. If that is your only asset, your value will be much worse 10 years later.

By the terms we use in Wall Street, every trading has a position, dating with you is also a “trading position”.

If the trade value dropped we will sell it and it is not a good idea to keep it for long term – same goes with the marriage that you wanted. It might be cruel to say this, but in order to make a wiser decision any assets with great depreciation value will be sold or “leased”.

Anyone with over $500k annual income is not a fool; we would only date you, but will not marry you. I would advice that you forget looking for any clues to marry a rich guy. And by the way, you could make yourself to become a rich person with $500k annual income. This has better chance than finding a rich fool.

Hope this reply helps. If you are interested in “leasing” services, do contact me.

Signed,

J.P. Morgan CEO

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GITANJALI GEMS LTD : Add Glitter to your Portfolio !!!

Scrip Code: 532715 / GITANJALI

CMP:  Rs. 311.05; Buy at Rs.305 & on dips.
Short term Target: Rs. 350, 6 month Target – Rs. 415; STOP LOSS – Rs. 280.60; Market Cap: Rs. 2,834.35 cr; 52 Week High/Low: Rs. 386.90 / Rs. 171.40

Total Shares: 9,11,22,095 shares; Promoters : 4,95,35,019 shares –54.37 %; Total Public holding : 4,15,87,076 shares – 45.63 %; Book Value: Rs. 246.98; Face Value: Rs. 10.00; EPS: Rs. 29.62; Div: 30.00 % ; P/E: 10.50 times; Ind. P/E: 10.11; EV/EBITDA: 13.26.

Total Debt: 1881.91 Cr; Enterprise Value: Rs. 5,080.05 Cr.

GITANJALI GEMS LTD:  Gitanjali Gems Ltd was incorporated in 1966 and is based in Mumbai, India. The company was started as a partnership. It came with an IPO in the year 2006 with 1.70 cr shares at the price band of Rs. 170 – Rs. 195. Gitanjali Gems has got two-diamond manufacturing facilities located at Borivali in Mumbai and at the Special Economic Zone in Surat. It has also got a 100 % export oriented unit in SEEPZ Mumbai, which produces gold and platinum studded jewellery. There are also jewellery-manufacturing facilities at MIDC, Andheri, which produces branded jewellery for the retail operations in India. The company has a workforce of over 2300 employees. Company sells its jewellery under the brand - Asmi - Premium work wear collection & has 104 outlets, 2 exclusive stores; Sangini - Entire product range including bridal jewelry; Nakshatra - Entire product range including bridal jewelry available with 374 retailers and 1 franchisee. More franchisees are being added; Gilli - Diamond jewelry at reasonable prices having 256 outlets of which 3 are exclusive stores; Vivvaha - Wedding jewelry; Maya - Gold jewelry for wedding and other similar events; D’Damas - International quality designs combined with Indian values sells through 380 retailers, 2 exclusive outlets, 3 shop-in-malls and 21 franchisees; Hoop - Fashion Silver Jewelry. The Gitanjali Group has acquired Lucera for Rs 25 crores in 2008. In October 2009, the UK-based Brand Finance, valued the four leading brands of the company at Rs.514 crores (Nakshatra), Rs.468 crores (Gili), Rs.309 cr. (D'Damas) and Rs.210 cr. (Asmi), respectively. GGL is not only gearing towards improving sales but is also looking at multiplying the value of these brands by 1.5 to 2 times year on year. With a manufacturing presence in India, its operations span the globe from the U.S., the U.K., Belgium, Italy, the Middle East, Thailand, South East Asia, and Japan. The company’s retail and distribution network comprised approximately 2,000 outlets, including 200 distributors, 94 exclusive stores, and 63 franchised stores. In December 2010, it acquired 90 % interest in Glantti Italia S.R.L. On March 17, 2011, it acquired 100% stake in N & J Finstocks Private Limited. In July 2011, it incorporated a wholly owned subsidiary Italian Jewels S.r. In August 2011, it incorporated a subsidiary Aston Luxury Group Limited. On December 2, 2011, its subsidiary Aston Luxury Group Ltd., acquired Crown Aim Limited. Gitanjali Gems Ltd is globally compared to Lao Feng Xiang Company Limited, Bulgari Societa per Azioni and Surana Corporation Limited in India.

Investment Rationale:

Gitanjali Gems is one of the largest integrated diamond and jewellery manufacturer and retailer in India. The demand for diamond and jewellery products are largely depends on higher employment and economic levels, which leave higher disposable income in the hands of the consumers. In downturn consumers can quite easily scale down their consumption of jewellery and diamonds. During the quarter ended the robust growth of Net Profit increased by 65.25 % Rs. 132.24 Cr. The value of four leading diamond jewellary brands of Gitanjali Gems - Gili, Nakshatra, Asmi and D’Damas rose 84 % i.e. Rs. 2,769 cr in the last two years. Net Sales and PAT of the company are expected to grow at a CAGR of 30 % and 46 % over 2010 to 2013E respectively. Gitanjali Gems Ltd has acquired 100 % stake of 'Crown Aim Limited' ('Crown Aim') and so has become step down subsidiary of the Company. Crown Aim is a Hong Kong based Company engaged in the business of distribution of Jewellery to China, Japan, USA, Middle East and Europe. In Addition, Crown Aim has a Jewellery manufacturing unit in China and plans to setup retailing of Jewellery in China. Crown Aim also has a 100 % subsidiary with the name Alfred Terry Holding Limited and a step down subsidiary named Alfred Terry Limited in London, for distribution of Jewellery in UK. Gitanjali Gems Ltd has incorporated a Wholly Owned Subsidiary in the name of Leading Italian Jewels S.r.l in Italy with a view to expand its business in Italy and adjoining region. The main activity of the newly incorporated wholly owned subsidiary is trading in precious stones, diamonds jewellery, pearls, etc. Gitanjali Gems Ltd has incorporated GGL Diamond, LLC in United States of America, through its wholly owned subsidiary Gitanjali USA, Inc. The main object of GGL Diamond LLC is to source and distribute diamond and jewellery. Gitanjali Gems Ltd has also incorporated a Wholly Owned Subsidiary in the name of 'Aston Luxury Group Limited' in Hong Kong with a view to explore and expand the International business of the Company in Asia Pacific.

Outlook and Valuation:

Gitanjali has increasingly undertaken retail expansion through the organic, inorganic and partnership routes. The retail space is around 1 million sq ft from 65,000 sq ft a year ago. The company has over 3000 Point of sales (POS). Gitanjali occupies nearly 60 % of the India’s entire organized mall space belonging to the jewellery category; it has aggressive retail expansion plans. Gitanjali expects to increase its retail presence to 2 million square feet, primarily in the domestic outlets in the next three years. All this features helps one to get that extra comfort in the stock. The enormous growth of the Indian gems and jewellery industry has seen the arrival of many new branded jewellery shops in various metros of this country. Brands such as, Damas Jewellery, Reliance Retail, Swarovski, and Joy Alukkas are either opening or have already opened their new branches. The availability of cheap labour and presence of well skilled people in various states of India is helping in the growth of diamond polishing and gold jewellery markets. According to experts in the jewellery industry the growing demand for expensive jewellery in India is a result of the strengthening Indian economy. India will soon overtake the US in the not so distant future, as per a statement given by Rapaport Group, the well known keeper of global diamond related data. India is the largest market for gold jewellery in the world, representing an amazingly 746 tonnes of gold in 2010. The net exports of gem and jewellery grew from US$ 22,616.35 in April-October 2010 to US$ 26,160.04 in April-October 2011. At the current market price of Rs. 310.00, the stock is trading at a PE of 5.20 x FY12E and 4.25 x FY13E respectively. The company can post Earnings per share (EPS) of Rs. 59.61 in FY12E and Rs. 73.03 in FY13E. One can buy Gitanjali Gems Ltd with a target price of Rs. 350.00 for Medium to Long term investment. Also one should add on Gitanjali Gems on dips !!!

KEY FINANCIALS	FY10	FY11	FY12E	FY13E
SALES (Rs. Crs)	6,527.63	9,456.40	12,198.75	14,394.53
NET PROFIT (Rs. Crs)	200.17	354.81	505.88	619.78
EPS (Rs.)	23.75	41.81	59.61	73.03
PE (x)	13.05	7.42	5.20	4.25
P/BV (x)	1.20	1.05	0.87	0.72
EV/EBITDA (x)	5.91	4.17	3.16	2.67
ROE (%)	9.23	14.16	16.79	17.06
ROCE (%)	10.17	12.34	13.84	14.50

I would buy Gitanjali Gems Ltd with a price target of Rs. 350 for Medium to Long term. As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of 8 % or Rs. 280.06 on every purchase.

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Infrastructure Bonds: Investment makes sense !!!

Lots of us have being hearing a lot on Infrastructure bonds and the tax exemption on it, many companies are coming out with their issues. Also its is almost that time of the year when you need to submit proofs of investments made by you to make sure that the tax deducted from your salary takes into account such investments. Infrastructure bonds are one of the investments options to save tax. Investments of upto Rs. 20,000 in such bonds qualifies for tax deductions.

Section 80CCF was introduced in the Income Tax Act, 1961 in the budget of February 2010. As per this section investments made in notified infrastructure bonds are exempt from tax up to maximum of Rs 20,000 per year. Section 80CCF allows individuals to invest Rs. 20,000 in infrastructure bonds, and reduce this amount from taxable income. This exemption is in addition to the Rs. 1,00,000 deduction under section 80C (Investment in instruments like ELSS Mutual Funds, Life Insurance, Provident Fund etc). But the interest income from infrastructure bond is taxable. The interest will be added to investor’s taxable income. This means even though the investment in these bonds is exempt from tax (maximum Rs 20,000) its interest income is not. This means investment under section 80CCF is advisable only after the investor has completely exhausted Rs One Lakh investment under section 80C.

Investment in infrastructure bonds makes sense for all tax payers given the good post tax returns. But investments are capped up to Rs.20,000 per annum for qualifying deductions, Beyond that, there are several other debt options that provides better  returns. The only decision, that remains for the tax payer is Should you invest now or wait for better yielding infrastructure bonds in the next year? This question is natural with given that the last year’s experience where those who waited till the last minute got better interest rates.

Company’s offers interest rates on the bonds based on the returns on comparable government securities for the prescribed period before the issue of the bonds. The government securities market is very volatile and is expected to remain so. Hence, it is difficult to predict whether future issues of such bonds are likely to carry the same or higher (or even lower) interest rates. Given the facts that this investment are capped at Rs. 20,000, it is unlikely to make a major difference (either way) to an investor and So, it is always better to get a highly - rated bond when available.

Now one will ask that Should you opt for buyback option after 5 years or to wait till 5 year lock-in period and then decide whether to continue with the bond for a further period or opt for the buyback option?

The answer would be that Your bonds will be priced at a premium, if you continue with the bond and if the interest rates for five year bond are ruling lower than 9 % at the end of five years, you can however, suffer a capital loss if you continue with the bonds at the end of five years and if the interest rates for such bonds are higher than 9 % at that time.

Given the low value of the investment vies – se – versa a high taxpayers overall investment portfolio, it is most unlikely that you will do a proper review before taking this decision, Hence, Choose the buyback option while applying for the bonds so that your returns are locked in. If you are able to take a proper review at the end of 5 years, you are allowed to change your selection but at least your criteria in taking a decision will not cost you adversely.

While making decision which bond to buy one should take into consideration the group issuing such bond; the kind of rating given to these group or its bonds. I would go for the bond  with higher rating at AAA as against AA+ issue & will go for public sector as against private companies for higher safety.

If a bond offers 9 % per annum – the post tax returns works out to 10.85 % (for those in the 10.30 % tax bracket), 13 % (20.60 % tax bracket), and 15.56 % (tax rate 30.90 % ). The returns are definitely good. This, of course assumes that you will use the buyback facility provided by the company at the end of five years and that the tax rate will remain constant throughout the 5 year period.

Currently IFCI TAX FREE BOND Series IV issue is open till 8^th February 2012; REC Infrastructure Bonds; SREI Infrastructure Bonds; PFS Infrastructure Bonds are on the block. Other than these companies Tax Free Bonds are also being issued by NHAI (National Highways Authority of India), IRFC (Indian Railway Finance Corporation), HUDCO (Housing & Urban Development Corporation) as well as PFC (Power Finance Corporation). The Central Board for Direct Taxes has allowed these companies to rise up to Rs. 30,000 Crores by issuing Tax Free Bonds for the financial year 2011-2012.

Since the above mentioned Tax Free Bonds by NHAI, IRFC, HUDCO, PFC cannot be directly classified as Tax Free Infrastructure Bonds we limit our discussion on them here.

However here is a basic comparison of all Open Tax Free Infrastructure Bonds Offerings (IFCI, REC, SREI, PFS):

Particulars	IFCI	REC	SREI	PFS
Issue Closes	8th Feb 2012	10th Feb 2012	31st Jan 2012	29th Feb 2012
Coupon Rate	9.09%/9.16%	8.95%/9.15%	8.90%/9.15%	8.93%/9.15%
Tenure	10yrs/15yrs	10yrs/15yrs	10yrs/15yrs	10yrs/15yrs
Buyback option at the end of	5/7 yr for 10yr bonds &5/10 yr for 15yr Bonds	5/7 yr for 10yr bonds &5/10 yr for 15yr Bonds	5/7 yr for 10yr bonds &5/10 yr for 15yr Bonds	Every Year(After 5th)-10yr Bonds; Every yr (After 7th)- 15 yr Bonds
Rating	'AA-'-Brickwork;'A+'-CARE;'A'-ICRA	NOT KNOWN	'AA'-CARE	NOT KNOWN
Face Value	Rs.5,000	Rs.5,000	Rs.5,000	Rs.5,000
Mini.Application	1 Bond	1 Bond	1 Bond	1 Bond

You can contact your broker for the application forms or you can also visit the respective companies websites for the online application . I have tried to bring a broader picture on Infra bonds 

Visit Companies Website links below for Infra Bonds - 

IFCI

REC

SREI

PFS
IDFC


______________________________________________

*Disclosure : The post just expresses the views of the author. Investment in Infra bonds depends on certain factors like risk profile,income, age etc. Do consult your financial planner before making investing decisions.

Indraprastha Gas Ltd: Strong Fundamentals, Buy on every Dip !!!

Scrip Code: 532514 / IGL

CMP:  Rs. 316.70; Buy at current levels.
Short term Target: Rs. 360, 6 month Target – Rs. 415; STOP LOSS – Rs. 291.40; Market Cap: Rs. 4,433.80 cr; 52 Week High/Low: Rs. 454 / Rs. 285

Total Shares: 14,00,00,160 shares; Promoters : 6,30,00,080 shares –45.00 %; Total Public holding : 7,70,00,080 shares – 55.00 %; Book Value: Rs. 71.70; Face Value: Rs. 10.00; EPS: Rs. 20.97; Div: 50.00 % ; P/E: 15.10 times; Ind. P/E: 20.45; EV/EBITDA: 9.68.

Total Debt: 346.49 Cr; Enterprise Value: Rs. 4,894.96 Cr.

INDRAPRASTHA GAS LTD: Indraprastha Gas Ltd was incorporated in 1998 and is based in Delhi, India. IGL provides natural gas for automobile, domestic & commercial use in Delhi, India. The company is a joint venture of GAIL (India) Limited, Bharat Petroleum Corporation Limited & the Government of the National Capital Territory of Delhi. In the year 1999 IGL took over Delhi City Gas Distribution Project from GAIL (INDIA). The company is the supplier of Compressed Natural Gas (CNG) to the automotive sector in the National Capital Territory of Delhi (NCT of Delhi). The company operates 241 CNG stations, provides PNG to 1,82,000 domestic & 355 commercial customers.  The company also markets and distributes Piped natural Gas (PNG) for domestic and commercial users in NCT of Delhi. The Company is supplying Re-LNG to 21 industrial consumers in Delhi. As of March 2011, the company had an installed & licensed capacity of 2.70 million metric standard cubic meters per day natural gas. CNG is a fuel for transport sector; it’s replacing traditional fossil fuels of petrol and diesel. PNG is used for household kitchens as well as commercial users such as hotels, hospitals, embassies & restaurants. PNG is supplied to the domestic and commercial sectors in the areas of Kaka Nagar, Bapa Nagar, Pandara Road, Pandara Park, Sunder Nagar and Sujan Singh Park. The company has entered in JV with Siti Energy to set up City Gas Distribution Projects at Sonepat and Paniat located at Haryana. IGL was awarded Golden Peacock Eco Innovation Award. BPCL holds 3,15,00,080 shares (22.5 %) & GAIL holds 3,15,00,000 shares (22.5 %) in Indraprastha Gas Limited. IGL is compared to Gujarat Gas Company Ltd, Confidence Petroleum India Limited & Gujarat State Petronet Ltd.

Investment Rationale:

The CNG is an environment friendly and one of the most economical fuels for transport sector. It is replacing traditional fossil fuels of petrol & diesel, as in running cost of the vehicles is comparatively low, it is more than 65 % cheaper than petrol and more than 20 % cheaper than diesel at the current prices. Metropolitan cities have already adopted the use of CNG at large scale but other cities of India are yet to follow the same. However, Petrol which is widely used as fuel for cars is getting dearer day by day and because of this the demand for other economical fuel like Diesel also increases. However, the diesel vehicles may be in demand for some period but due to environmental concern and excess demand, the auto users will seek out other cheaper and more environment friendly options like CNG. The price difference of CNG and alternate liquid fuel will also continue to drive the large scale conversion of petrol driven private vehicles into CNG mode. Introduction of more CNG variant models by car manufactures will also provide a fillip to CNG sales in coming years. Indraprastha Gas LTD commands monopolistic situation to sell and supply CNG & PNG services in Delhi and NCR region. IGL has taken number of price hikes in last few years. Last time company has hiked the price of CNG by Rs. 2.00/kg in Delhi & NCR region on 31 Dec 2011. Imported gas is over four times costlier than the D6 gas which is sold at $4.20 per unit. IGL had raised PNG rates on 1^st Sept 2011 from Rs. 18.95 per unit to Rs. 22 per unit. Due to the monopoly of company, IGL easily manages to pass on the raise in the price of CNG or PNG onto its customers and thus able to maintain the gross profits margins. Indraprastha Gas Ltd is looking to buy stake in Mumbai base gas retailer MAHANAGAR GAS LTD (MGL). MGL offers piped natural gas to around 5 lakhs domestic customers and around 1200 small commercial and industrial establishments in Mumbai and adjoining across Mumbai, Thane, Mira Road – Bhayander and Navi Mumbai. This acquisition will help to expand its existence in another metropolitan city of the country.

Outlook and Valuation:

India’s oil and gas sector holds strategic importance in the economy as it meets around 42 % of the country’s primary energy demand and contributes over 15 % to the gross domestic product (GDP). With an interesting mix of private and government companies, the industry is scaling new heights in domestic and international markets. With a strong resource position, India ranks second (behind Australia and ahead of Vietnam), in BMI’s upstream Business Environment ratings while the country shares first place with China in BMI’s downstream Business Environment ratings. The recently released BMI forecasts states that India will account for 12.4 % of Asia Pacific regional oil demand by 2015, while satisfying 11.2 % of the supply. Due to increasing refining capacities, India is set to be a top exporter of petro-products in Asia, surpassing South Korea. India’s exports of refined products stood at 0.95 million barrels per day (b/d) as of June 2011 and US$ 4.6 billion worth of petroleum products were exported during July 2011. Recently, the Company signed long term supply agreement with Delhi Transport Corporation, which contributes approximately 25 % of CNG Sales. Net Sales and PAT of the company are expected to grow at a CAGR from 25 % in 2010 to 41 % by 2013E. During the quarter, the company reported an increase in Net Profit to Rs. 77.22 Cr from Rs. 66.27 Cr in previous year same quarter. IGL plans to expand its network to other part of Delhi and NCR regions and to other metropolitan cities like Mumbai. It has plans to invest around Rs. 600 cr by FY13. The capex amount will be equally divided between CNG & PNG product services and from which has already spent around Rs. 300 cr in first half of FY12. Company is going to add new CNG pump stations to its network between FY12 -13. Out of these around 50 stations are likely to be operational by FY12, while 35 more stations are in construction mode, which will be ready to use by FY13. Due to raising prices of other fuels like Petrol & diesel, the demand for CNG equipped vehicle is expected to rise in coming years. Actually the prices of mostly used fuel Petrol vehicles like cars has been increased rapidly in the last few years, now passengers are looking for other cheaper options and CNG is a good option. Company is expecting more than 50,000 cars which are likely to be converted into CNG on an annual basis in Delhi and DTC i.e. Delhi Transport Corporation, a big consumer of CNG is likely to launch additional 4,000 buses over the period of next couple of years. At the current market price of Rs. 316.70, the stock is trading at a PE of 13.51 x FY12E and 10.60 x FY13E respectively. The company can post Earnings per share (EPS) of Rs. 23.44 in FY12E and Rs. 29.87 in FY13E. One can buy IGL with a target price of Rs. 415.00 for Medium to Long term investment and for the SHORT TERM PLAYERS it should be Rs. 360.00

KEY FINANCIALS	FY10	FY11	FY12E	FY13E
SALES (Rs. Crs)	1,083.83	1,750.46	2,406.88	3,008.60
NET PROFIT (Rs. Crs)	215.50	259.76	328.09	418.24
EPS (Rs.)	15.39	18.55	23.44	29.87
PE (x)	20.84	19.73	15.62	12.25
P/BV (x)	5.44	5.10	3.85	2.93
EV/EBITDA (x)	11.17	10.21	7.68	6.14
ROE (%)	26.11	25.88	24.63	23.90
ROCE (%)	39.30	29.54	31.09	31.24

I would buy IGL with a price target of Rs. 415 for Medium to Long term and Rs. 360 for the Short term players. As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of 8 % or Rs. 291.50 on every purchase.


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Larsen & Toubro : Grab Great Business at Great Price !!!

Scrip Code: 500510 / LT

CMP:  Rs. 1131.80; Buy at current levels & on Dips.

Short term Target: Rs. 1155, 6 month Target – Rs. 1400; STOP LOSS – Rs. 1040;  Market Cap : Rs.  69,171.21 Cr; 52 Week High / Low: Rs. 2001.70 / Rs. 969.15

Total Shares: 61,11,61,097 shares; Promoters : 26,18,94,131 shares –42.85 %; Total Public holding : 34,92,66,966 shares – 57.15 %; Book Value: Rs. 351.07; Face Value: Rs. 2.00; EPS: Rs. 66.62; Div: 725.00 % ; P/E: 16.98 times; Ind. P/E: 12.81; EV/EBITDA: 10.55.

Total Debt: 7,161.11 Cr; Enterprise Value: Rs. 77,282.67 Cr.

LARSEN & TOUBRO LTD: LARSEN & TOUBRO LTD was founded in 1938. Larsen & Toubro Limited operates as a technology, engineering, construction, and manufacturing company worldwide. Larsen’s divisions include Engineering and Construction Projects (E&C), Heavy Engineering (HED), Engineering Construction and Contracts (ECC), Electrical and Electronics (EBG), Machinery and Industrial Products (MIPD), and Information Technology & Engineering Services. These divisions undertake engineering design and construction of infrastructure and industrial projects, including civil, mechanical, and electrical & instrumentation engineering. The customer profile includes names, such as Samsung, Chevron, Bechtel, Kvaerner, Pirelli, Siam Michelin, and Goodyear. The Heavy Engineering (HED) division manufactures and supplies custom designed and engineered critical equipment and systems to the needs of core-sector industries and the defense sector. It is the preferred supplier of equipment for a select range of products, globally. The Division has entered into Shipbuilding business and engages in construction of specialty commercial vessels and warships for the navy, as well as the coast guard.  The Engineering Construction and Contracts (ECC) division delivers engineering, procurement, and contract solutions in the oil and gas, petrochemicals, power, and water space industries. The Electrical and Electronics (EBG) division offers solutions in low & medium voltage categories. Its businesses consists of switchgear, switchboards for different applications, including marine, meters, automation systems, petroleum dispensing pumps, medical equipment and tooling solutions and has operations at different locations in India (two in Mumbai and one each in Ahmednagar, Mysore, Faridabad and Coimbatore) and one unit for manufacturing operations in China. The Information Technology and Engineering Services Information and Technology Services division offers e-Engineering solutions, including product design and engineering analysis, engineering process support, production and plant engineering, asset information management, and design automation to high end technology verticals, such as automotive, aerospace, marine and ship design, plant engineering, and industrial products. This division also provides embedded systems and solutions comprising supply of hardware, application software, and enclosure design for electronics product design and development in automotive, medical, semiconductor, and industrial products. On November 30, 2009, Nuclear Power Corporation Of India Limited and Larsen & Toubro Ltd. announced the formation of a joint venture company to produce special steels and ultra heavy forgings. On January 22, 2010, Larsen & Toubro Ltd. formed a joint venture with Sapuracrest Petroleum Bhd to undertake installation of pipelines and construction of offshore rigs and platforms in India, West Asia and South East Asia. L&T does business in Malaysia, the United States, the Unite Kingdom, Brazil, Saudi Arabia, the United Arab Emirates, Qatar, Bangladesh, and Sri Lanka. L& T LTD is compared globally with Ssangyong Engineering & Construction, Aker Solutions ASA and JTEKT Corporation.

Investment Rationale:

Larsen & Toubro’s (L&T) construction arm has bagged various orders aggregating to Rs. 1,000 cr in 3QFY2012. In the buildings and factories segment, the company has secured a Rs. 200 cr order from GMR Group for the construction of an air traffic control tower and associated works at Delhi International Airport. In the power Transmission & Distribution segment, the company has obtained new orders adding up to Rs. 334 cr from reputed clients for the construction of transmission lines and substations across India. An international order valued at Rs. 185 cr has been secured in Kuwait for the construction of a substation and associated overhead transmission line works. Orders valued at Rs. 282 cr were secured from Greater Mohali Area Development Authority for the construction of utility facilities such as water supply network, waste-water collection network, storm water network, road works, electrical works and other associated development works in Aerocity, Mohali. With these orders in hand, the company’s outstanding order book stands at whopping Rs. 1,50,553cr (3.4x FY2011 revenue), which provides good revenue visibility. This order booking takes the company’s total declared orders to Rs. 8,364 cr until now in this quarter against orders received worth Rs. 13,336cr in 3QFY2011. The drying up of order inflows is one of the major concerns for the stock and has led to underperformance in the recent past. L&T retained its revenue growth guidance at 2 5% for FY12E on the back of a robust order backlog and stable execution therefore giving optimistic assumption with higher probability of downward revision in ensuing quarters. However it sharply revised down guidance for EBITDA margins and order inflows; it is expected that EBITDA margins could decline by 0.75 % -1.25 %; there could be change in revenue mix and sharp increase in raw material prices. It is expected that growth in order flows could be muted by 5 % against 15 % – in view of 11 % yoy decline in H1FY12, This sector see no signs of revival in investment spends and continued postponements in order finalizations, but as said earlier that LARSEN & TOUBRO has an order book at whopping Rs. 1,50,553cr its is easily possible for L&T to bring its revenue on track as L&T is in better placed than its peers on a number of counts (such as diversification and balance sheet strength). L&T is best placed to benefit from the gradual recovery in the capex cycle, given its diverse exposure to sectors, strong balance sheet and cash flow generation as compared to its peers, which grapple with issues such as trained cash flow, high leverage and limited net worth and technological capabilities

Outlook and Valuation:

I initiate my coverage on L&T with Buy, on the back of its robust core businesses, infrastructure opportunities and potential for value unlocking in its subsidiaries. Core business would drive earnings, as it has robust order book and good revenue visibility. Subsidiaries like IT Services, and Infra would be valuation triggers. The infra-led growth would also be backed by growing portfolio and geographical reach via JVs & acquisitions giving good revenue visibility. L&T has underperformed BSE Sensex and being in trading range from Rs. 970 – Rs. 1100, owing to factors such as slowing order inflows and rising competition (especially in the BTG equipment segment), leading to fears of slippage on order inflow guidance. Also, L&T lost the public sector shipyard, Mazagon dock, for defense and naval ships and failed to win the recent ONGC pipeline tenders. It is believed that though L&T would find it difficult to meet its revised guidance for FY2012 (growth of 5 % in order inflow and 25 % in revenue), but still it is better placed than its peers on a number of counts (such as diversification and balance sheet strength). L&T is best placed to benefit from the gradual recovery in the capex cycle, given its diverse exposure to sectors, strong balance sheet and cash flow generation as compared to its peers, which grapple with issues such as trained cash flow, high leverage and limited net worth and technological capabilities. On the valuation front, due to the recent correction in prices, the stock is trading at PE of 14.85x and 12.63 for FY2012E and FY2013E earnings respectively, adjusted for subsidiary value, which is lower than its historical PE of 15-20x gives an excellent opportunity to grab such a fantastic business at such a low price & Hence, any further price correction provides a good opportunity to accumulate. Larsen & Toubro to declare its Q3 results ended 31st Dec 2011 on 23rd Jan 2012.

KEY FINANCIALS	FY10	FY11	FY12E	FY13E
SALES (Rs. Crs)	43,698.90	52,099.10	61,061.50	67,581.40
NET PROFIT (Rs. Crs)	3,374.50	4,179.00	4,566.20	5,269.20
EPS (Rs.)	56.20	68.90	76.20	89.60
PE (x)	23.80	19.40	17.50	14.90
P/BV (x)	3.80	3.30	2.80	2.40
EV/EBITDA (x)	14.00	12.10	11.70	10.40
ROE (%)	19.30	18.20	17.30	17.60
ROCE (%)	15.60	14.30	12.90	13.10

I would buy LARSEN & TOUBRO LTD with a price target of Rs. 1400 for Medium to Long term and Rs. 1155 for the Short term players. As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of 8 % or Rs. 1040 on every purchase.


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